More insight on the “sell side” beast

Having spent just over 6 years of my wide-eyed youth in a sell-side, bank owned securities firm, I learned my loathing for the beast first-hand.  That said, far from a wasted experience, I remain greatly enriched by the education:  it taught me everything I know today about what not to do with money. 

Although much has been written about the conflicted, self-serving nature of the risk-selling machine, I am often surprised at how little intelligent people seem to understand about it still.   Lots of good people who are smart and educated in lots of fields, are hopelessly naive when it comes to the ingrained and damaging bias of the financial industry.  Witness that the bulk of investors still rely on the sell-side for their financial advice.  ‘Nuff said.

For those not yet clear, this article offers a wonderful review of the conviction of optimism so endemic to the industry:

“As though we needed another reminder, the early-year plethora of “second half recovery” economic and corporate earnings forecasts highlighted the consistent over-abundance of optimism among sell side analysts. In order to understand this phenomenon it is important first to throw out any assumptions you have about investing and then fully comprehend that the goal of every capital markets participant is not to correctly predict the course of markets – it is to generate commission today. The entire structure of the industry, from the personality types favored by HR to the compensation structure to the seating arrangements are all designed to facilitate this.

Consider the daily routine of, say, a typical institutional equity salesperson. They are generally at their desks reading news feeds and research published overnight by 7:00am. The research meeting starts at 7:30 and the analysts present any changes to the earnings forecasts of their companies and the economists and strategists may outline their predictions. At 8:00 they return to their desks and at this point the truly rich separate themselves from the merely wealthy. Between 8:00 and 9:30 the salesperson calls their best clients (ie the most aggressive traders) – mutual fund, hedge fund and pension fund managers – and attempt to leverage any information they’ve learned since 7:00 to get these clients to make trades. Their careers are dependent on these calls – it is, in other words, their entire job.

You may have been under the assumption that analysts, economist and strategists are compensated to the extent they are correct in their forecasts. This is only true to the extent that accurate predictions generate trade commission…”

Read the whole article here, (thanks Tom) including the truth about Abbey Joseph Cohen and co.